Oil Search (ASX: OSH) announced that it has concluded a deal to acquire all the outstanding shares in InterOil, which is valued at approximately USD 2.2 billion. Shareholders in InterOil are also entitled to a contingent cash payment depending on the volume of 2C hydrocarbon gas resources in the Elk-Antelope fields. InterOil shareholders may opt for a cash alternative to the share component of up to $ 770 million with any cash not being taken up to be used for an Oil Search share buyback program.
The transaction is expected to close in the third quarter of 2016. Separately, the company also announced that it has signed a memorandum of understanding with Total to sell 60% of the interest acquired in InterOil as well as 62% of the exploration assets. The two companies will focus on developing the Papua LNG project and pursue cooperation and integration opportunities with the PNG LNG project. This transaction is expected to be completed shortly after the proposed acquisition has been completed. The transaction results in the increase of the stake of Oil Search in the Papua LNG Project to 29% and Total to 48.1%, consequently, de-risking the acquisition.
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InterOil Acquisition (Source: Company Reports)
The MOU with Total is expected to deliver value to shareholders of Oil Search, InterOil and Total while underpinning the value of the acquisition and providing certainty and incremental liquidity. It establishes the long-term alignment between Oil Search and Total both of whom have substantial interests in the Papua LNG project and provides an opportunity to maximise the value of the project because of the pursuit of cooperation and integration opportunities.
Strategically, the acquisition strengthens the world class LNG position of Oil Search with both the expansion potential of the PNG LNG project and the Papua New Guinea project continuing to progress while other competitive projects are being delayed or cancelled. The long-term market outlook for gas continues to be promising and shortages are anticipated early in the next decade. The expansion and the project are expected to start producing early in the next decade, when there will be increased demand and a shortage of supply.
Oil Search is expected to remain cash flow positive and well positioned for growth with a strong balance sheet. The positive cash flow is expected to continue even if oil prices are well below the current levels and the break even for 2016 is focused at around USD 19/bbl. No change in dividend policy is expected and distribution will continue to be maintained at 35% to 50% of annual core profits. The cash alternative of up to USD 770 million will be funded from liquidity, which is currently over USD 1.6 billion, consisting of total cash and the available corporate revolving facilities. The upfront payments from Total are expected to be in the region of USD 1.2 billion to be received shortly after closing. Pro forma net debt decreases to around USD 3 billion post completion of Total transaction, which is around USD 300 million less than the pre-acquisition position.
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